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Archive for the ‘Compensation’ Category

In the aftermath of the financial crisis of late 2008 and the resulting global recession, defenders of the US financial system maintained that it was a source of US competitive advantage. Our capital markets facilitate the exchange of money and risk and thereby not only help maximize productivity but also attract businesses to our economy.

With the exception of some of the more exotic financial structures, I tend to agree. Just as the shift from barter to physical currency enabled new economic prosperity, more sophisticated financial instruments and capital markets (properly regulated) benefit individuals, businesses and entire economies.

The same could be true of social capital. Today people already exchange favors, debts of gratitude and obligations of reciprocity on a daily basis. Indeed, reciprocity seems to be deeply ingrained in the social nature of humanity. Dunbar’s number could be explained as the result of the cognitive limits on mental accounts in social groups.

What if companies could make all these invisible exchanges more visible? How might collaboration and innovation benefit? What would a system of social currency look like? How would it effect rewards and incentives?

Such a system is both possible and relatively easy to implement using a combination of gamification concepts and social technologies. Here is a hack that I have been mulling over recently.

Every year allocate to employees a set number of social currency point – say 200 per employee. They can choose to hold onto the points or they can award points to colleagues as a thanks for helping out – say, 1 point for a discrete favor or for providing some much needed insight as a subject matter expert, 5 points for consistently being a team player who goes above and beyond, 10 points for saving the day and making the difference on an important project. (Publishing very basic guidelines will help.)

Require some information on why the points are being awarded, and make that information public. This will enforce some discipline and avoid frivolous exchanges. Making the information public also reinforces the inherent value of the social currency.

For 1 point, the information required can just be an option in a drop down; for 5 points require an additional one or two sentences – for 10 or more, maybe a short blurb. Include the date. As you collect information and track awards, you build a data set on social interactions that can be analyzed later.

At the end of the year, everyone is entered into a raffle for prizes with the number of entries per person being somehow proportional to the points that the entrants have accrued by the year’s end. There can be multiple winners, and smaller prizes are probably better than really large ones. The goal is to make the whole process fun and slightly augment the value of the currency without distorting the normal social incentives so much that employees start gaming the system just to win.

The (unpleasant) experience of going through our performance review process at work this summer, primed by Dan Ariely’s book The Upside of Irrationality (even better than Predictably Irrational), left questioning a lot about how we management talent. In particular, I began to wonder whether coupling performance feedback with compensation and promotion decisions really makes the most sense.

If we got back to first principles, would the two still be coupled? Does the performance review actually better inform compensation or does compensation distract from providing and receiving valuable feedback? Do raises and bonuses reinforce the feedback loop of performance reviews or frustrate intrinsic motivations? Do the business needs to award raises on a fiscal calendar compromise the timeliness and relevance of the associated performance feedback?

The hypotheses I came up with to answer these questions all went into the system of mastery feedback loops described below and the performance support groups I suggested as a near term way of realizing some of the benefits.

The name “Mastery Feedback Loops” is derived from Daniel Pinks’ Drive. In it, he identifies three intrinsic motivations in the workplace: purpose, autonomy and mastery (to which I would also add identity, to account for the social nature of the human animal, but that’s another discussion). The practice formerly known as performance management needs to be better aligned with these intrinsic motivations. For that reason, mastery feedback loops would differ in three important ways:

The focus would be on mastery of capabilities – Instead of obsessing on backward looking metrics, the goal would be to constantly improve and make appropriate investments in a firm’s talent (even when that means “reallocating resources” away from underperforming talent). Coaches, rather than managers, would help individuals identify the capabilities that are important to the success of the business (collective, purpose-driven goals) as well as the individuals ongoing professional development (autonomous goals). Metrics would then be set to monitor progress toward the ideal mastery of those capabilities.

The process would be decoupled from compensation and promotions – Tying feedback to promotions and raises only increases the stress and negative emotion from both receiving and giving constructive criticism. Taking that out of the equation returns the focus to where it should be – continuous improvement, kaizen for the individual. Concerns about that next bump up create a distraction and can poison the employee/manager relationship. Money may also not be the best way to motivate the desired behaviors.

Feedback would be social and continuous – Freed from the strictures of the fiscal calendar, feedback could be delivered with more frequency so individuals can monitor their progress on an ongoing basis, helping to set the stage for flow in the workplace. Brining in a greater variety of perspectives will improve the quality of feedback and incentives for improving, helping individuals understand how they are perceived by all parts of the organization (social esteem being important to human happiness).

An interesting area for further investigation might also be how to align performance management better to the intrinsic motivations of groups as well as individuals. As the social behavior of hives and swarms suggest, it cannot just be assumed that the same intrinsic motivations will dominate in a group.

Organize into groups of 7-13 individuals, ideally around specific capabilities or competencies that the constituents are looking to develop or that are important to their roles at the company

Meet regularly (weekly if possible) for an hour or so over coffee (or other refreshments) in something like a performance support group (hmmm, maybe that’s what we should call this hack)

Working together without any nominated leader, set mastery goals for each person in the group; maybe assign some at home individual pre-work so the process moves quickly while meeting

Help “coffee chat” members set specific metrics to monitor their progress toward mastery and figure out how to take the necessary measurements

Each week (two weeks or month), discuss where each person is at and provide advice on how to improve

Use an online tool (e.g. wiki, Google Site, etc.) to post metrics of progress and to solicit and provide feedback asynchronously

At the end of the year and start of the formal performance review, prepare documentation on each group member, signed collectively by the group, recording how that person’s performance has changed over the course of the year; this document can be brought into conversations with management as an additional data point in the review/evaluation/appraisal and help make the case for promotions and raises where appropriate

Pink both validated some of what I had been saying before and at the same time raised some good points about the down side to contingent bonuses (essentially changing my views).

I still like the idea of a year end bonus to make wages more flexible, but now I see it as just that – flexible wages – and not an effective tool for motivation. I wondered before about its efficacy on that last count but attributed short comings mostly to suboptimal feedback loops. Maybe Netflix is on to something more than I originally thought.

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I began a discussion on compensation here by addressing 2 of the 3 primary objectives I believe compensation should have: 1) attract, 2) retain and 3) motivate talent. In this post, I would like to focus on the last point.

Most compensation can be divided up into salary, bonus and benefits. Salary doesn’t motivate much beyond showing up each day for work since it is a fixed amount that is only tenuously connected to performance (perform, get a raise, don’t perform, lose your job). I would argue that the base salary really serves best to attract and retain talent with a secure source of income.

Benefits, a.k.a. perks including health insurance and beyond, are also key to attract and retain talent, especially since an innovative combination of benefits can provide employees with more satisfaction at lower cost to the employer. I don’t want to spend a lot of time now trying to make the case for what kinds of benefits an employer should offer (although that could be something worth mulling over). Instead, I want to focus on how bonuses could be better used to motivate people.

Bonuses can be an effective tool for performance based compensation. The better you do, the more you get paid as a bonus (something extra). So what are the behaviors a company should try to motivate?

Start with the company’s strategic objectives and success metrics then solve back to the individual drivers of that success. Objectives and metrics must be clear and mutually understood. Sales commissions are an easy example, although sometimes they misalign to individual’s success rather than company’s collective success. Remember, optimizing for the components does not necessarily optimize the system so there needs to be a balance between incentives for the individual, smaller organizational units and the entire firm.

The more closely a company can tie a bonus to a behavior, the more effective it will be as a motivator. Bonus schemes also need to guard against people gaming the system, e.g. options backdating, so only true performance is being rewarded.

The familiar bonus yearend schemes are too blunt an instrument. The most basic is the yearend bonus, paid in cash, stock or some combination. In most cases, the individual’s performance is diluted by the company’s overall performance, which in turn can depend on the economic environment.

I think bonuses can be much more effective and targeted. What about using peer financial awards? Empower your employees to award a coworker $10 for lending a hand on a tough challenge. Let them give out $50 once every so often to someone who consistently goes the extra mile and defines team player. The actual amount doesn’t have to be much to have an impact, and recipients can enjoy the concomitant satisfaction of peer esteem.

Don’t wait for year end. Make it easy to give an award when the behavior to be rewarded is first observed. Enter a sentence or two for a small award, a longer description for a larger one, then systematically send a notification to the individuals and managers involved. At the end of the year, these award can be additional data points going into the usual year end performance review process.

Yearend bonuses still make sense since companies operate on a yearlong fiscal calendar, but these should reward collective success. Use the individual yearend performance review for promotions and raises. (Then again, why wait until yearend, why not assess promotions quarterly?) Also, consider using something other than profitability to measure collective success. Employees may feel profitability is too far out of their control. When Gordon Bethune wanted to take Continental from Worst to First, he created an ontime bonus that everyone shared in, not just the ground crew or the gate agents.

Some companies, such as Netflix, have completely eschewed bonuses, but I don’t entirely agree with this. A well designed bonus scheme can help make wages more flexible and responsive (in economic terms, less sticky), effectively cutting wages when the going gets tough and averting the need to lay off staff. What’s needed is a more targeted combination of salary, benefits and bonuses aligning the success vectors of the individuals, organizational teams, and the company.

There has been a lot written recently about executive compensation. What got me thinking about it most recently is an article in the WSJ.

Compensation should serve to 1) attract, 2) retain and 3) motivate talent. The third point I’ll save for another posting. Satisfying the first two requires firms to benchmark against the other firms that are competing for the same talent (note: firms that compete for talent may not necessarily compete for sales). There is an entire industry of HR consulting and executive recruiting firms that earn their fees helping companies with this benchmarking.

Remaining wage competitive is the reason so many banks and auto manufacturers are worried about government imposed caps on compensation. The logic goes that if they can’t offer competitive compensation, they won’t be able to attract the talent necessary to salvage their companies. What’s missing is any acknowledgement of the winner’s curse. Compensation is a great example of how imperfect, private information can cause a bidder to overpay.

There’s no doubt in my mind that some people are paid more than the actual value they add to a company – at every level. Junior analysts at investment banks are Excel monkey. I don’t care if they live in the office. Over time, through the absurdities of corporate promotion policies, people advance and their earnings become ever more disconnected from the value they add. A sense of entitlement seems to have been derived in part from unreasonable wage expectations that leaves illegal labor filling in the jobs Americans don’t want.

There is reason to believe the wage difference between highly developed economies such as the US and the rest of world is not sustainable. A readjustment of our wage expectations may be in order as economies such as China, India and Brazil realize their potential. While I’m skeptical about a flight of valuable services jobs oversees akin to the offshoring/outsourcing trend of recent memory, I do believe competition from foreign labor markets will exert a downward pressure on wages.

Along the way, there will be corollary lifestyle adjustments in order: smaller houses, fewer cars, maybe even less consumer debt and more savings. I think that’s the kind of slow recovery we are in for after this last bubble’s burst, which isn’t necessarily a bad thing. There’s substantial evidence that income inequality leads to instability, and in a digital, wired world images abound of how much better the haves have it. The manifestation is anti-western sentiment, couched in other issues. The transition to lower wages and consumption habits won’t be painless but managed well, it will help us get to a better place.